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Retirement income strategies

Building a retirement income strategy starts with a realistic look at what you'd like your retirement to be like—and what that lifestyle will likely cost.

You've spent your entire working life saving for retirement. And while saving is important, the way you manage your retirement savings could be even more important. That savings, after all, typically becomes your income—and shifting from a saving mindset to a spending one can be difficult for many people.

Building a retirement income strategy starts with a realistic look at what you'd like your retirement to be like—and what that lifestyle will likely cost—establishing your priorities and understanding the tradeoffs of each option. That can result in something of a balancing act for your emotional as well as financial life. There is no one-size-fits-all retirement, and as such there's certainly no one-size-fits-all retirement portfolio. But most retirees should consider their investments through a variety of considerations:

Growth potential: It's important that the growth of your investment portfolio outpaces inflation, but you should balance that need for growth against the risk of exposing your savings to excessive market fluctuations.

Guaranteed income: Investment returns fluctuate—often significantly. But fixed income annuities can provide an income stream to help cover essential expenses and help you prepare for retirement with greater certainty. Income annuities, however, may come with limited or no access to assets and withdrawal penalties1 that can impact your ability to take the money you may need. You may also consider a combination of annuities with other fixed income investments such as Treasury bonds and Certificates of Deposit to generate the cash flow you need to help cover essential expenses.

Flexibility: Having access to and control over your assets is important for some but flexibility usually means you may give up a higher amount of income in exchange for access.

Principal preservation: Knowing that your investment is safe can help you sleep at night, but investments that aim to preserve your principal, such as fixed deferred annuities, money market funds,2CDs or Treasury bonds, come with a different sort of risk. These investments generally offer relatively low yields—and your principal might not be large enough to generate enough income from interest or dividends to fund your desired retirement lifestyle. Plus, if you invest too conservatively, your savings may not grow quickly enough to keep pace with inflation.

Building retirement income strategies

While there are a number of ways to maximize your retirement assets, here are 4 of the most popular.

The first is for people whose assets are large enough or they have enough in terms of other income from a pension, Social Security, or another source that they do not need to draw down principal.

1. Interest and dividends only

If you've accumulated enough savings, it may be possible to use income generated by your portfolio to meet all of your retirement income needs. A typical portfolio could include bonds, bond funds, CDs, and dividend-paying stocks.

Pros

  • Minimal risk to principal if you're investing in FDIC-insured CDs3 or US government bonds4
  • When assets invested in bonds or CDs mature, the entire principal is returned to you5

Cons

  • The need to roll over bonds and CDs at maturity complicates long-term income projections because it is impossible to know future interest rates
  • Limited investments in stocks could leave you exposed to inflation risk
  • A heavy allocation in bond funds or dividend-paying stocks could expose you to increased market risk

2. Investment portfolio only

Making regularly scheduled withdrawals from your investment earnings and principal is another approach. In this scenario, your investments are managed for a total return.

Pros

  • Generates income and, depending on asset allocation, may provide growth opportunities
  • Making automated withdrawals simplifies the process
  • Greater flexibility and access to savings

Cons

  • May require more active management
  • Savings may not last through the end of your life

3. Investment portfolio plus guarantees

By using a portion of your assets to purchase an annuity, you add an element of certainty to your retirement income. An income annuity is an insurance contract purchased from an insurance company that provides a guaranteed stream of income for life or a set period of time.6

Pros

  • Annuity income can be guaranteed for life—so this strategy can help cover essential expenses and manage the risk of outliving your savings
  • Fixed income annuities provide a set payment each annuity income date; using additional assets, you can also purchase a feature—commonly referred to as a cost of living adjustment (COLA)—that will increase your payments each year to help your income keep pace with inflation
  • Because an income annuity can provide a guaranteed source of income, you may be able to invest the rest of your portfolio with an eye toward growth

Cons

  • You may give up some control over a portion of your savings
  • Expenses associated with an annuity could be higher than other types of strategies
  • Income from the annuity might not be sufficient, causing you to draw down your other savings more than you'd like

4. Short-term bridge

If you need some additional income for a period before full retirement, you may also want to consider using some of your assets to fund a short-term bridge strategy. Perhaps you will not be receiving Social Security or drawing on a pension or 401(k) immediately after you retire. Or, maybe you expect additional expenses due to a more active early retirement lifestyle. To help you "bridge" the gap, you might consider investing a portion of your portfolio in a way that will produce enough income to cover the gap, while investing the remainder for total return.

See how this strategy might work for you by investigating Model CD Ladders, or you might consider period certain annuities, which pay income for a set period of time. You can choose from a 1-, 2-, or 5-year CD ladder or a period certain annuity of 5 or more years.

Pros

  • A good way to generate an income stream for a fixed time period
  • The total return portion of your portfolio may produce enough growth to protect against inflation

Cons

  • Assets invested in total return strategy may be exposed to market risk
  • You must make certain that the assets in your total return portfolio will be adequate to cover your retirement income needs following your bridge period

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More to explore

1. Withdrawals of taxable amounts and taxable income received from an annuity are subject to ordinary income tax. Withdrawals of taxable amounts taken before age 59½, may be subject to a 10% IRS penalty. 2.You could lose money by investing in a money market fund. Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund's sponsor has no legal obligation to provide financial support to money market funds and you should not expect that the sponsor will provide financial support to the fund at any time. 3. For purposes of FDIC insurance coverage limits, all depository assets of the account holder at the institution will generally be counted toward the aggregate limit for each applicable category of account. FDIC insurance does not cover market losses. For more information regarding FDIC coverage, please consult www.fdic.gov. 4. Treasury securities are backed by the full faith and credit of the U.S. government for the prompt payment of interest and principal at maturity. 5. Subject to the credit risk of the issuer. 6. Guarantees apply to certain insurance and annuity products and are subject to product terms, exclusions and limitations and the insurer's claims-paying ability and financial strength. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Your ability to sell a CD on the secondary market is subject to market conditions. If your CD has a step rate, the interest rate may be higher or lower than prevailing market rates. The initial rate on a step-rate CD is not the yield to maturity. If your CD has a call provision, which many step-rate CDs do, the decision to call the CD is at the issuer's sole discretion. Also, if the issuer calls the CD, you may obtain a less favorable interest rate upon reinvestment your funds. Fidelity makes no judgment as to the creditworthiness of the issuing institution.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

Displayed rates of return, including annual percentage yield (APY), represent stated APY for either individual certificates of deposit (CDs) or multiple CDs within model CD ladders, and were identified from Fidelity inventory as of the time stated. For current inventory, including available CDs, please view the CDs & Ladders tab.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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